Smart ways to beat a housing bubble

The sudden enthusiasm for housing, seen in the early spring auction clearances, and Rismark-RP Data’s September house values should be watched. Photo Rob Homer

Robert Harley

The reduction in mortgage rates just as house prices kick has renewed talk of a housing bubble.

It seems premature. A month ago the housing pundits were worried about quite the opposite.

But former Reserve Bank board member Warwick McKibbin told The Australian Financial Review that a renewed property boom was a big risk flowing from the RBA’s Tuesday decision, and the likelihood of further cuts to come.

“If you’re transferring a bursting bubble from the commodity boom into a bubble in the housing market, when it bursts it’s going to be much more catastrophic,” he warned.

Remember 2009. The rescue rate reductions that followed the Lehman collapse, along with the launch of the extra First Home Owners Boost, created a boom.

Or check the record books on 1988. Back then, the dramatic cut in rates after the October stock market collapse ignited a property boom from which many markets took a decade to recover.

Home buyers gained more purchasing power and investors, quitting equities and fixed interest, plunged into real estate.

Interest rates are the critical driver of property. But the link between falling interest rates and a housing boom is not immutable.

Record low rates in the US did not halt the US house price collapse. Only now, after two rounds of quantitative easing, is the once over-supplied, and over-priced, housing market reaching some equilibrium.

Low interest rates did, however, have a dramatic impact on the values of prime US office towers and shopping centres which now trade on yields at, or lower, than those ahead of the GFC.

This week the Future Fund’s head of property, Barry Brakey, warned of bubbles in some commercial property markets as investors bid for hard assets in a low rate world.

“This financial repression, if you like, of interest rates around the world can lead to bubbles forming in different markets, and we want to be really careful that we’re on the right side of that,” he told the Australian Property Institute Pan Pacific Conference.

House price bubbles, and their aftermath, are crippling. The US bubble of the 2000s burst the world economy. For that reason, the Reserve Bank has long monitored Australian house prices – and moved at times of concern.

Unusually, RBA Governor Glenn Stevens made no comment about housing in his Tuesday statement.

But the RBA has shown its view.

“While prices nationally have stopped falling in recent months, any recovery is unlikely to produce housing price growth much faster than income growth, as was seen through much of the 1990s and 2000s, because that earlier period was one of adjustment to the structural decrease in nominal interest rates and liberalisation of the banking system,” the RBA wrote in its September Financial Stability Review.

The Review also dismissed concerns, most recently expressed by the Australian Prudential Regulation Authority, that as the banks fought for business, lending standards could fall.

Housing is still weak. August new house sales hit a 15-year low, the Housing Industry Association said.

The housing response to the four cash-rate cuts since last November is more muted than in the mid-1990s. The sudden enthusiasm for housing, seen in the early spring auction clearances, and Rismark-RP Data’s September house values should be watched.

But there is plenty of time to respond if anything like bubble behaviour emerges.